by Addison Wiggin & Ian Mathias
- Health care reform one step closer… The 5 examines a few fiscal facts
- David Walker, American pollsters identify President Obama’s biggest challenge
- Dan Amoss on a reoccurring short-side opportunity in the stock market… that’s appeared again today
- Merkel hints Greek bailout is no sure thing… Bill Gross on this peculiar age of government rescues
The vote was intense. Up until the last day, it looked as if the wrong side would prevail. Perhaps “the people” wanted otherwise, but we couldn’t stomach such an outcome. Some calls were made, e-mails sent. Today, we hail it a victory, despite some naysayers…
Trish has been voted Ultimate Baltimore’s best bartender!
Thanks for helping us give credit to our favorite barkeep. She puts up with us far too frequently, and deserves a break. More cynicism in today’s reader mail, below.
Oh, yeah, and there was another, less historic vote over the weekend: The House passed the health care reform bill.
As groundbreaking as it seems, the bill’s passage was business as usual… passed at 10:49 on Sunday night, highly partisan, hugely unreadable (2,400 pages of legalese) and frighteningly expensive. At least there appear to be far fewer ridiculous pet projects and pork spending… no subsidies for toy wooden arrows this time.
Watch the news for 10 minutes today and you’ll get a lifetime’s worth of debating/shouting/bickering over the bill, so we’ll stick to our beat — dollars and deficits. Two whole levels of bullets for this beast:
• The latest price tag is $940 billion — about $70 billion more than the Senate version
• Congressional magicians say it will ultimately reduce the deficit by $138 billion. Double magic — that’s actually a larger reduction than the cheaper Senate proposal. Spend more, save more… only in Washington.
• Who’s paying the tab?
- $132 billion in Medicare cuts
- 40% tax on “high-cost employer-sponsored group health plans,” aqua the Cadillac health care coverage.
- Nearly double the tax rate on Medicare payroll, from 1.4% to 2.3%, for families making over $250,000 a year.
- Tens of billions in fees for Big Parma, medical device makers and — of course — insurance companies.
- New minimums on pretax health care spending accounts
- A “tanning tax” — 10% levy on indoor tanning salons, aka New Jersey.
There’s that, and Congress expects to eke out another $500 billion in projected growth in the Medicare fund over the next 10 years. Easier said than done…
“President Obama has to maneuver his way through a lot of constituencies, including Democratic senators and congressmembers, his own staff and special interest groups,” David Walker wrote in our inaugural issue of Apogee Advisory. “Underneath it all, he may actually be a fiscal reformer. If he enacts major fiscal reforms, he will have one indispensable constituency on his side: public opinion.
“Ask the American people and they will tell you overwhelmingly that our sustained fiscal health is fundamentally important. In fact, we at the Peterson Foundation did ask them. The foundation commissioned a rigorous national poll by Hart Research Associates and Public Opinion Strategies in late March 2009. We wanted to see whether the recent hard times had made people more likely to accept reforms. And the answer was yes.
“People have a right to be concerned about out-of-control spending and about plans to further expand the federal government. I fully expect that public concern will increase more now that the more long-term deficit projections have been released and Washington pushes for even more health care entitlements.
“We’ve heard other presidents make strong statements regarding fiscal responsibility. Even President Bush 43 pledged to be fiscally responsible. Boy, was he telling a whopper! Let’s be fair to President Obama. It’s still early in his first term. However, as of this writing, there is no plan to put a process in place to achieve a ‘grand bargain’ or to seriously reform federal spending programs and tax policies. Hopefully, one will be coming soon.”
The market reaction to health care reform? Here’s our favorite: Traders now say Berkshire Hathaway debt is more secure than that of the U.S. government. Two-year BRK notes yield 3.5 basis points lower than a 2-year Treasury note this morning.
Stocks don’t seem to care about the new legislation. The market opened flat this morning.
“The stock market has handed us another opportunity to buy cheap puts on the ‘less than truckload’ (LTL) sector,” Dan Amoss wrote his Strategic Short Report readers on Friday. As he said, this is not their first foray into shorting the trucking industry. SSR readers bought puts on Old Dominion late last year and booked 85% gains in barely a month.
“The LTL industry is trucking with a high level of service and logistical support. LTL carriers usually pick up multiple shipments from multiple customers on a single truck and then route those shipments through service centers, where freight is transferred to other trucks with similar delivery destinations. Fixed costs in LTL are high, so the industry is quick to cut prices to keep its network fully utilized.
“Since we cashed in our ODFL puts, things haven’t changed other than a few LTL industry executives promoting the hopeful idea that LTL rates will firm up and excess capacity will be absorbed in a recovering 2010 economy. The LTL stocks have all rallied strongly since early February, pricing in a strong recovery in profitability.
“But we’re not going to see strength in LTL rates in 2010. In thinking about this issue of shipping rates, it’s important to focus on which party has the leverage in the relationship: the truckers or the customers of the truckers. I expect the truckers’ customers — especially the big ones like Wal-Mart and Coca-Cola — to hold onto the dominant negotiating position. They’ll play one LTL supplier against another and push for the lowest possible pricing.”
If you want in on this second go-round shorting the trucking biz, look no further than the latest issue of Strategic Short Report.
As it turns out, traders aren’t concerned with much of North America at all today. It’s a lady from Deutschland that has everyone’s attention:
“Greece isn’t insolvent and therefore the question about assistance isn’t the one we need to be talking about now,” German Chancellor Angela Merkel said over the weekend. “We always talk about the so-called markets that always respond to signals. I think it’s important that we don’t create illusions.”
Translation: A Spartan bailout is not a sure thing. Yawn.
“For a while, it seemed that all was well, that the government’s checkbook could replace the private market’s wallet and credit cards,” Bill Gross wrote over the weekend. “Ah, but Dubai, Iceland, Ireland and, recently, Greece pointed to a potential flaw in the model. Shaking hands with the government was a brilliant strategy in 2009, when it was assumed that governments had an infinite capacity to leverage themselves.
“But what if they didn’t? What if… our modern era was similar to history over the past several centuries, when financial crises led to sovereign defaults or at least uncomfortable economic growth environments…What if — to put it simply — you couldn’t get out of a debt crisis by creating more debt?”
Whatever the answer, “Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and the large industrial corporations across the globe, suggest a more homogeneous ‘unicredit’ type of bond market. If core sovereigns such as the U.S., Germany, U.K. and Japan ‘absorb’ more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle.”
In the same vein: The FDIC “rescued” seven banks on Friday. That brings the annual total up to 37. The failed institutions held a combined $3.3 billion in assets and will cost the Fed’s bankrupt deposit insurance fund another $1.3 billion. Just as Gross worried… how long until the American banking industry is better capitalized than its regulator?
Merkel’s warning yesterday gave the dollar a nice boost. The dollar index is up half a point from Friday’s low, to 80.7.
That, of course, is bad news for gold. The spot price is barely clinging to $1,100 as we write.
“I could not restrain myself from commenting on the central bankers buying gold,” a reader writes. “If one always would have bought gold when the central bankers or IMF sold it and sold it when they bought it, one could have done quite nicely without much risk.
“So maybe it is time to sell gold now and wait till they sell theirs and then start buying again. Just a thought.”
“I like your goal to ‘cut thru the claptrap’,” another reader writes, in response to our beta issue of Apogee Advisory. “I think a lot of people want that. We also want our government to want that! Maybe that will never happen. Your approach, in some ways, reminds us of The New Hampshire Gazette, ‘The Nation’s Oldest Newspaper,’ continuously printed since 1756, when founded by Daniel Fowle — whose descendant, Steven Fowle, is the current editor.”
“Very informative and entertaining,” another adds. “I actually made audible sounds as I read through it, smirks, snorts, lots of wows and even a hearty laugh. Enjoyed the primer on world and U.S. politics. Hope to hear opinions on Canada and Mexico.”
The 5: Thanks… keep it coming.
“Yes, I voted for Trish, whom I have never met,” a loyal reader writes of Baltimore’s newly crowned best bartender. “It looks like we readers (baa, baa, black sheep) put your recommendation over the top. Yeah! Or wait a minute… I have mixed emotions about this form of collusion. Makes me think about how government works… do I get a freebie Mick car bomb when I come visit y’all? Or should I have negotiated that before casting my vote?
“So… you’re helping someone get votes,” another adds, “by enlisting the support of folks who don’t even have a dog in the fight, and in return for helping someone get the votes you’re expecting some sort of material gratitude. Tsk, tsk… how like a lobbyist!”
The 5: Wow. A lot of you wrote in with this same sentiment. We apologize for appearing to stuff the ballet box.
The 5 Min. Forecast
P.S. If you’re close to Dallas, Texas, and you’re looking for something to do on Friday for lunch, check this out. Fellow Reserve member Hank Mulvihill has been a portfolio manager since 1987. He’s also the founder of FED FRIDAY — an economic outlook and risk-management forum, now in its eighth year.
The topic for Hank’s next FED FRIDAY event — set for Friday, March 26, at the Hilton Dallas Lincoln Centre — is America: Boom or Bankruptcy?
Tomorrow, we head for Rancho Santana with other Reserve Members during our "Chill Weekend"; otherwise, I’d be on my way to Dallas to attend Hank’s event myself. Instead, I’m passing the invitation to you…
If you like, check out Hank’s FED FRIDAY event here. He says five other Reserve members have already said they’re planning to attend.